Yes, there were lots of Americans who were not greedy or foolish during the housing bubble, and many resent the idea that their neighbors might get a bailout they don’t deserve. They need to get over themselves. If housing prices keep falling, many millions of additional homeowners will find themselves, through no fault of their own, with underwater mortgages. Besides, foreclosures damage property values for everyone, not just those losing their homes.

Through no fault of their own? Let’s unpack this.

If you borrowed to buy a house in one of the rapidly inflating markets during the past few years, you were playing the bubble game, too.

If you borrowed against the value of the house for a second mortgage for any reason at all, you were playing the bubble game.

If you are a long-term owner and were counting on the appreciation to finance your retirement or your bail-out to a place where homes were more affordable, you were playing the bubble.

His plan, which many others have floated in recent days, is designed to put our kids on the hook for the prolificacy of people who were encouraged to be spendthrifts. But it’s a direct slap in the face to a huge group of other people.

If you are a renter who didn’t jump into the market because you understood that to do so would be reckless, you are, in Nocera’s world, a dupe. You’ve been overpaying for your rent due to inflated home values, and while you waited for sanity to return so you might be able to afford to borrow to buy a home, you now learn that you’re still out of luck.

This plan would freeze in place a system that encouraged greed, and penalize those of us who waited for markets to become more sane. It turns out that being responsible in this insane nation is to be naive. That message will penetrate throughout the culture as the scope of all these bailouts — which exempt people who did the right thing — becomes clear.

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3 thoughts on “Journalist's Housing Rescue Idea: Reward Recklessness”

Yep, couldn’t have said it better myself. As someone who ‘moderately’
played the bubble (we took out a modest second mortgage) we did not
1 – borrow to buy speculative properties (2nd homes, investment properties)
2 – Borrow heavily to finance luxurious trips
3 – play the ARM game to free up additional monthly funds to purchase big
screen TV’s, fancy vacations, new cars, etc

We live in the bay area and have many friends who did all this and more, and
the thought of them reverting their ARM mortgages to fixed rate, or some
other financial reward stings. We feel like we were fairly responsible
during the madness of the last few years, and while we saw our neighbors
being reckless, we remained sane. If they are now rewarded, something is
seriously wrong with the whole concept of capitalism (or socialism, which is
really where we are today).
Don’t get me wrong, I fully understand the implication of *not* helping
those who made bad decisions, but something must be done to penalize the bad
behavior. Some suggestions:
1 – Let them convert ARM to fixed rate, but with a ‘surcharge’ (or penalty)
of b/w 0.5%-1.0% This penalty could be factored into their IRS bill,
effectively allowed them to pay back the US Gov’t the rescue funds ‘benefit’
that they received over the course of the next 15-30 years.
2 – Place those who are ‘rescued’ into a special income tax bracket that
adds an additional % to their yearly income tax. Same idea as #1, but it
wouldn’t be tied to a specific property.
3 – place a special US Gov’t lien on the rescued properties so when they are
sold at some point in the future, the tax payers can recover their
investment
4 – We need to be careful not to rescue folks who don’t actually need to be
rescued. Let’s not make the same mistake that California did when prop 13
was rolled out. There should be some sort of ‘liltmus’ test as to who is
eligible to receive funds. Do you own more than 2 homes? Do you own a
business? Do you have an AGI of >$500,000? We need to make sure that steps
are taken to help those who are truly in need, and not just throw money at
the wealthy who can afford to bail themselves out.

It’s also a slap in the face to people like my wife and I, who stayed in our existing house and refi’ed to shorten our loan payoff (15 years) and lock in a new low fixed rate. We also used our home equity line to renovate our existing house – increasing it’s value, and GREATLY increasing it’s energy efficiency (new double-glazed windows throughout, new hi-efficiency furnace, etc).

Thanks for the post Dan. It’s good to know there are journalists out there who understand (and have understood, for a long while, based on your Mercury News column) what this bubble has done, and what needs to be done about it. Propping up house prices artificially is not the way to go.

We were willing to let the market do its thing on the way up. Now that it’s correcting and the fever is breaking, are we supposed to put hot towels on its forehead? I think not. Let the adjustment happen with the (regrettable) economic pain and we can move forward soon thereafter, in better shape than would come from a long, agonizing correction resulting from attempts to delay and deny the core problem.